HEDGEYE Exchange Tracker | Up and To The Right

Takeaway:Open interest at CME registered an all-time high of 111.2 MM contracts and the company has solid guidance across the board this morning.

CME Group (CME), one of the few stocks that sits on our Best Ideas list as a long, put up a decent fourth quarter earnings print this morning with a slight revenue and earnings beat. Not that we put much weight on what happened last quarter but trends into the new operating period are looking even better. The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, this week at over 111 million contracts. January activity for the Merc is averaging 18.2 million contracts per day, up 16% year-over-year. Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.

Weekly Activity Wrap Up

1Q16TD average daily volumes (ADVs) in cash equities and futures continued to rise this week. Cash equity volume for the week came in at 9.3 billion shares traded per day, bringing the 1Q16TD ADV to 9.3 billion, up +34% Y/Y. Futures activity at CME and ICE came in at 24.7 million contracts traded per day this week, bringing the 1Q16TD ADV to 24.1 million, up +21% Y/Y. Additionally, CME is currently at an all time high in open interest of 111.2 million contracts, which should push volume higher going forward. Options did not have as strong a week, coming in with 16.9 million contracts traded per day, bringing the 1Q16TD ADV down to 18.7 million, although that still registers +23% Y/Y growth.

U.S. Cash Equity Detail

U.S. cash equities trading came in at 9.3 billion shares per day this week, bringing the 1Q16 average so far to 9.3 billion shares per day. That marks +34% Y/Y and +31% Q/Q growth. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of first-quarter volume, which is consistent with the prior quarter and year-ago quarter, while NASDAQ is taking a 19% share, +65 bps higher Q/Q but -84 bps lower than one year ago.

U.S. Options Detail

U.S. options activity came in at a 16.9 million ADV this week, bringing the 1Q16TD average to 18.7 million, a +20% Y/Y and +17% Q/Q expansion. In the market share battle amongst venues, NYSE/ICE has been trending downward at a moderate pace, but at an 18% share it is +106 bps higher than the year-ago quarter. Meanwhile, NASDAQ's recent declines bring it -418 bps lower than 1Q15. CBOE's market share is down -148 bps Y/Y but has improved recently; its 27% share of 1Q16TD volume is up +130 bps from 4Q15. BATS and ISE/Deutsche have been taking share from the competing exchanges, with BATS up to a 10% share from 9% a year ago and ISE/Deutsche taking 16%, up from 13% a year ago.

U.S. Futures Detail

17.9 million futures contracts traded through CME Group this week, bringing the 1Q16TD average to 18.1 million, a +21% Y/Y and +37% Q/Q expansion. Additionally, CME open interest, the most important beacon of forward activity, currently sits at an all-time high of 111.2 million CME contracts pending, good for +22% growth over the 91.3 million pending at the end of 4Q15, an improvement from last week's +17%.

Contracts traded through ICE came in at 6.8 million per day this week, bringing the 1Q16TD ADV to 6.1 million, +21% Y/Y and +27% Q/Q growth. ICE open interest this week tallied 68.1 million contracts, a +7% expansion versus the 63.7 million contracts open at the end of 4Q15, an improvement from +5% last week.

Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.

Sector Revenue Exposure

The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:

Takeaway:In last night's Democratic debate, Hillary Clinton appeared to beat out a meandering Bernie Sanders.

Editor's Note:Below is a brief excerpt from Potomac Research Group Senior Analyst JT Taylor's Morning Bullets sent to institutional clients each morning.

ABOUT LAST NIGHT...

We saw one of the most substantive, spirited, and aggressive debates of the whole election so far last night. From our perch, Clinton outperformed expectations and we suspect she'll take a significant bite out of Sanders' 30-point lead in New Hampshire on Tuesday.

Both did well throughout the night (and the moderators didn't compete for the spotlight), but after they sped through the 'stump speech' portion of the debate in the first hour, the advantage shifted Clinton's way as she demonstrated her versatility and command of the issues.

Bernie didn't do as well with the open format, and meandered at several points before reverting back to his familiar Wall Street refrain. The real upshot of last night is that Clinton showed something new, engaging, and well, presidential – injecting some much-needed confidence back into her campaign as the trail heads south where she needs to hit her stride.

All was not entirely copacetic on the Clinton side, though...

CLINTON STUMBLES

We've said this before and we'll say it again: Hillary Clinton remains puzzlingly inept at handling questions about her ties to Wall Street. While she was marginally better on the topic last night, when asked on Wednesday about the nagging issue of receiving $600,000 in speaking fees from Goldman, her response was: "Well, that's what they offered."

Her campaign staff is at least sensitive to the issue, rescheduling her second Wall Street fundraiser in as many weeks until after the New Hampshire vote. Between the speaking fees and campaign contributions, her rhetorical assault on the financial sector rings hollow, even to non-Sanders supporters.

Think January Was Bad? Here's Why Next Month's Jobs Report May Be Even Worse

Editor's Note: Below is a complimentary excerpt from a research note written yesterday by our Financials team. Analysts Jonathan Casteleyn and Josh Steiner analyze yesterday's Challenger Job Cuts report, a key leading indicator for what's happening in the jobs market. If you would like more information about subscribing to our institutional research, please contact sales@hedgeye.com.

The Challenger Job Cut announcements moved up notably in January, as the below chart from our Macro Team shows. Energy jobs cut popped to 20,103 which is in-line with the fastest rates of job loss in Energy we've seen since the beginning of Energy's decline.

While the energy sector's woes have been ongoing for some time, the newer development is the deterioration of non-energy labor conditions. Announced job cuts ex-energy were 55,011 in January, which brings the total announced cuts to 75,114, which is the highest level by far in the post crisis period, notwithstanding the one-off military related labor adjustment in July 2015.

To put this in perspective, that brings total announced layoffs to +42% Y/Y in January with no underlying distortions present in the data. Outside of Energy, Retail was the second biggest loser with job cuts rising 15.5k Y/Y.

This emergent trend of worsening labor conditions is also manifest in the initial jobless claims data. Seasonally adjusted claims continued their upward trend last week, rising by 8k from the revised 277k to 285k, and the year-over-year rate of change in rolling NSA claims has essentially converged to zero, deteriorating from -3.2% in the previous week to just -0.8% in the latest week.

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Takeaway:DECK no near term turnaround, but cutting store anchor. New Bed Bath traffic driver - pretzels.

DECK -No near-term turnaround, but cutting store anchor

We never really understood the DECK store opening strategy. Now the company is hiring a 3rd party to close 15% of its current portfolio.

If you look at the store opening cadence since 2006 when the company had just 2 stores and fast forward to where we are today at 142 doors, and what that's subsequently done for returns as capex as a % of sales went from 1% as UGG relied on its wholesale distro to 5% at the height of the sq. ft. investment, it tells a pretty compelling negative story.

The question now is, as costs roll off and the company abandons its store strategy, will we see margins re-inflate and asset turns re-accelerate as the fixed asset base consolidates. The top line has been underwhelming for 3 straight quarters and doesn’t give us confidence in the immediacy of a turnaround, especially in an economy that is #latecycle.

We wouldn't touch this with a 10 foot pole on the long side today, with inventories up 26% on 1% sales growth. But it’s a name over the course of 6-9 months that might be worth taking a look at as working capital gets cleaned up, and assets are rationalized.

BBBY - This Bed Bath promo email is hilarious.

BBBY sent out this promo email yesterday, and it featured a bag of pretzels. That's it, a bag of pretzels. It's comical to think that a $2 discount on a bag of Pretzel Crisps can drive foot traffic. 'In Store Only'!

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